Republic v. Ker & Co., Ltd. G.R. No.

L-21609 1 of 6

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21609 September 29, 1966
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
KER & COMPANY, LTD., defendant-appellant.
Office of the Solicitor General for plaintiff-appellant.
Leido, Andrada, Perez and Associates for defendant-appellant.
BENGZON, J.P., J.:
Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950 on
the following dates:

Year Date Filed

1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951
It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.
In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts and
subsequently issued the following assessments for deficiency income tax:

Year Amount Date Assessed

1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953
due and payable on dates indicated in the accompanying notices of assessment. The assessments for 1948 and 1950
carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of fraudulent returns.
Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue reduced the
assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00,
imposed the 50% surcharge for the year 1947 and eliminated the same surcharge from the assessment for the year
1950. The assessments for years 1948 and 1949 remained the same.
On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for review with preliminary
injunction. No preliminary injunction was issued, for said court dismissed the appeal for having been instituted
beyond the 30-day period provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of
L-12396.
On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together with
a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to pay, instead
in its letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's
Republic v. Ker & Co., Ltd. G.R. No. L-21609 2 of 6

right to collect the tax. Subsequently, the Republic of the Philippines filed on March 27, 1962 a complaint with the
Court of First Instance of Manila seeking collection of the aforesaid deficiency income tax for the years 1947,
1948, 1949 and 1950. The complaint did not allege fraud in the filing of any of the income tax returns for the years
involved, nor did it pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5%
surcharge for late payment and interest of 1% per month without however specifying from what date interest
started to accrue.
Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the
proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.
On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for the
dismissal of the complaint on the ground that the court did not acquire jurisdiction over the person of the defendant
and that plaintiff's cause of action has prescribed. This motion was denied and defendant filed a motion for
reconsideration. Resolution on said motion, however, was deferred until trial of the case on the merits.
On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set up in its
motion to dismiss of April 14, 1962.
On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker & Co., Ltd.
adopted the same answer which it had filed on May 18, 1962.
On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which states:
WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947, but
orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the amounts of
P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each amount and interest of
1% a month computed from March 27, 1962 and until full payment thereof is made, plus the costs of suit.
On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that the right
of the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a
lapse of merely five years and three months, because the taxpayer's income tax return was fraudulent in which case
prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332 (a)
of the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the date it
fell due as indicated in the assessment notices instead of on the date the complaint was filed.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the Court of
First Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine
years, one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and since
the filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations,
the right of the Commissioner of Internal Revenue to collect the tax in question has prescribed.
The two motions for reconsideration having been denied, both parties appealed directly to this Court.
The issues in this case are:
1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.? .
2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1947
prescribe?
3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the running of
the statute of limitations to collect the deficiency income for the years 1948, 1949 and 1950?
Republic v. Ker & Co., Ltd. G.R. No. L-21609 3 of 6

4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and 1950
accrue?
First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons
was not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons
upon whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, which reads:
SEC. 13. Service upon private domestic corporation or partnership.If the defendant is a corporation
formed under the laws of the Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent, or any of its directors.
Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its administrative stage.
The same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later to
this Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962,
demanded the payment of the deficiency income tax in question, it was Messrs. Leido, Andrada, Perez &
Associates who replied in behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962 and April 10, 1962, both
after the complaint in this case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates
received the summons, they were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability
involved in this case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of
Rule 7, aforequoted, service upon the agent of a corporation is sufficient.
We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction
over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has
prescribed. By interposing such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative
defense on the basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide
the said plea of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who,
being the proponent of the affirmative defense, should be deemed to have abandoned its special appearance and
voluntarily submitted itself to the jurisdiction of the court.
Voluntary appearance cures defects of summons, if any. Such defect, if any, was further cured when defendant filed
its answer to the complaint. A defendant can not be permitted to speculate upon the judgment of the court by
objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over
its person if and when the judgment sustains its defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal
Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because the assessment was
issued on July 25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12, 1948) it
filed its income tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's income tax
return was fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten years from
discovery of the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.
The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for 1947 was
fraudulent.
The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was issued
within the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the Commissioner of
Republic v. Ker & Co., Ltd. G.R. No. L-21609 4 of 6

Internal Revenue to assess the tax has prescribed. Said the lower court:
The Court resolves the second issue in the negative, because Section 331 of the Revenue Code explicitly
provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5 years after the return
was filed, and no proceedings in court without assessment, for the collection of such taxes, shall be begun
after expiration of such period. The attempt by the Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of authority
against the aforequoted explicit and mandatory limitations of statutory law. Settled in our system is the rule
that acts committed against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil
Code). . . .
Said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint
alleged no fraud, nor did the plaintiff present evidence to prove fraud.
In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd.
filed a false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax
assessment, which has become final and executory, the finding of the Commissioner of Internal Revenue as to the
existence of the fraud has also become final and need not be proved. This contention suffers from a flaw in that it
fails to consider the well-settled principle that fraud is a question of fact which must be alleged and proved. Fraud
is a serious charge and, to be sustained, it must be supported by clear and convincing proof. Accordingly, fraud
should have been alleged and proved in the lower court. On these premises We therefore sustain the ruling of the
lower court upon the point of prescription.
It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and
executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e.,
prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases. In this case
however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the
issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have
waived its right to object to the setting up of such defense.
Third Issue
Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the collection
of the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one month
and eleven days from February 16, 1953, the date the tax was assessed, the right to collect the same has prescribed
pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines however contends that the running of
the prescriptive period was interrupted by the filing of the taxpayer's petition for review in the Court of Tax
Appeals on March 1, 1956.
If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not
counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect the
tax has not prescribed.
The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped
the running of the prescriptive period to collect because said court did not have jurisdiction over the case, the
appeal having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it
adds, the Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme
Court in L-12396 aforementioned.
Republic v. Ker & Co., Ltd. G.R. No. L-21609 5 of 6

Under Section 333 of the Tax Code, quoted hereunder:

SEC. 333. Suspension of running of statute.The running of the statute of limitations provided in Section
331 or three hundred thirty-two on the making of assessments and the beginning, of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during
which the Collector of Internal Revenue is prohibited from making the assessment or beginning distraint or
levy or a proceeding in court, and for sixty days thereafter.
the running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in
court, and for sixty days thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect of
legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance
for the collection of the tax? Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the
legality of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner
of Internal Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax Appeals,
from filing an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate
the judicial policy of avoiding multiplicity of suits and the rule on lis pendens.
It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency
assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except that for
1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter requested
suspension of the collection of the tax without penalty incident to late payment pending the filing of a
memorandum in support of its views. As requested, no tax was collected. On May 22, 1954 the projected
memorandum was filed, but as of that date the Commissioner's right to collect by warrant of distraint and levy the
deficiency tax for 1950 had already prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. filed a
petition for review in the Court of Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to
collect the tax, that is, by judicial action. However, as stated, an independent ordinary action in the Court of First
Instance was not available to the Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals,
supra, in view of the pendency of the taxpayer's petition for review in the Court of Tax Appeals. Precisely he
urgently filed a motion to dismiss the taxpayer's petition for review with a view to terminating therein the
proceedings in the shortest possible time in order that he could file a collection case in the Court of First Instance
before his right to do so is cut off by the passage of time. As moved, the Tax Court dismissed the case and Ker &
Co., Ltd. appealed to the Supreme Court. By the time the Supreme Court affirmed the order of dismissal of the
Court of Tax Appeals in L-12396 on January 31, 1962 more than five years had elapsed since the final assessments
were made on January 5, 1954. Thereafter, the Commissioner of Internal Revenue demanded extra-judicially the
payment of the deficiency tax in question and in reply the taxpayer, by its letter dated March 28, 1962, advised the
Commissioner of Internal Revenue that the right to collect the tax has prescribed pursuant to Section 332 (c) of the
Tax Code.1awphl.nt
Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal
Revenue simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be
encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.
Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in
Republic v. Ker & Co., Ltd. G.R. No. L-21609 6 of 6

question. This being so, the provisions of Section 333 of the Tax Code will apply.
Fourth Issue
The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for 1948,
1949 and 1950 accrued and should commence from the date of the assessments as shown in the assessment notices,
pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint was filed as determined in the
decision appealed from.
Section 51 (e) of the Tax Code states:
SEC. 51(e). Surcharge and interest in case of delinquency.To any sum or sums due and unpaid after the
dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said
tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons.
(emphasis supplied)
Exhibit "F" the letter of assessment shows that the deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with Section 51(d) of the Tax Code.
Since the tax in question remained unpaid, delinquency interest accrued and became due starting from said due
dates. The decision appealed from should therefore be modified accordingly.
WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest at the
rate of 1% per month shall be computed from March 15, 1953 for the deficiency income tax for 1948 and 1949 and
from February 15, 1954 for the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, Sanchez, and Castro, JJ., concur.